Cournots Model Of Oligopoly

Cournot’s Model

Illustration 82

Presume the market demand curve for a homogenous commodity is provided by R = 200 – V.
There are two industries each with an invariable marginal cost MC of $20. We are to
ascertain that if these two industries behave as Cournot Duopolists, what will be the
symmetry price and total industry productivity.

Solution

Cournot’s solution to the duopoly problem cannot be made by obtaining the reaction
functions of the two industries. For procuring the reaction function we need to evaluate
the marginal revenue MR of every duopolist which is equated by him with marginal cost
MC to optimum profits. Therefore, for manufacture (1),

TR = R.V1

Where TR symbolises for total revenue, which can be procured from multiplying rate with
volume manufactured and sold.

As R = 200 – V

TR1 = (200 – V).V1

Therefore, V = V1
+ V2 we have

TR1 = 200V1 – (V1
+ V2) V1

= 200V1 – V1^2 – V2.V1

Now, MR1 = ΔTR1 = 200 – 2V1 – V2
ΔV1

Now setting marginal revenue MR of product 1 equal to marginal cost MC to optimise profits,
we have

MR1 = MC

200 – 2V1 – V2 = 20

200 – 20 – V2 = 2V1

180 – V2 = 2V1

V1 = 180 – V2
2

= 90 – ½ V2 …..Equation
(1)

The Equation (1) is the reaction function of industry (1).

Likewise, reaction function of industry (2) can be formulated which will be equal to:

V2 = 180 – V1 = 90 – ½ V1
2

Now, the two reaction function equations can be mutually resolved to procure the values
of V1 and V2. Therefore,

V1 = 90 – ½ V2 …..
(1)

V2 = 90 – ½ V1 …..
(2)

Substituting the value V2 in (1), we have

V1 = 90 – ½ (90 – ½ V1)

= 90 – 45
+ ¼ V1

V1 = 45
+ ¼ V1

-45 = ¼ V1 – V1

45 = ¾ V1

V1 = 45
* 4/3 = 60

Substituting the value of V1 = 60 in (2), we obtain the value of V2 as follows:

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